THE owner of the Clydesdale and Yorkshire banks today said the UK market remained challenging despite showing tentative signs of economic recovery.

National Australia Bank said its UK arm had benefited from lower bad debt charges and the easing of funding costs.

But the bank said the proportion of its loans in arrears had worsened due to deterioration in the commercial property portfolio.

Group chief executive Cameron Clyne said: "Our United Kingdom franchise remains well positioned to benefit from any improvement in operating conditions.

"We will continue to monitor market developments in the UK."

The bank is among several foreign players thought to be considering bids for UK banking assets as a result of a Government shake up of the country’s financial system to introduce more competition.

Speculation has linked NAB with potential offers for the so-called "good" part of recently split Northern Rock, as well as branches to be sold off by Royal Bank of Scotland and Lloyds Banking Group to appease European competition authorities.